Introduction and Objectives
The Insolvency and Bankruptcy Code, 2016 (Code) was enacted by the legislature
as a key mechanism for addressing the companies/ partnership firms/ individuals
(Corporate) in distress through reorganisation and process of insolvency
resolution. The new Code replaced all the foregoing debt recovery laws and
created a single procedure to resolve the corporate distress pertaining to
insolvency and bankruptcy.
The Code empowered the creditors to examine and inspect the viability of the
debtors before making business decisions. Further the delays in disputes were
addressed by formulating a time-bound mechanism for resolutions which further
helped in promoting entrepreneurship and availability of credit in the market.
The quintessence of the new Code is to balance out the interests of all
stakeholders and revive the Corporate as a going concern by way of timely
The Code introduced a completely new mechanism of Corporate Insolvency
Resolution Process (CIRP) that granted corporate debtors a moratorium period
during which financial creditor, operational creditor or debtor himself,
resolves the insolvency of a debtor through financial restructuring and creditor
Further to facilitate a formal and time bound CIRP, the Code created a robust
institutional framework, comprising of Insolvency Professionals, Insolvency
Professional Agencies, Information utilities, Adjudicating Authorities and
Insolvency and Bankruptcy Board.
Current Standing and Assessment
On completion of over five years of new Code, the regime has drifted away from
the debtor in control to the creditor in control. The latter model curbs out the
unfair benefit that the Debtors had over the creditors during the recovery
process by giving the managerial control of corporate debtor to the creditors.
The creditor appoints its managers to run the company till the time company is
fully revived and able to function again effectively. This concept was essential
to ensure the continuance of business and to get the maximum value of the
company by way of resolution. The adjudicating authority and the apex court has
time and again cleared the objective of the new Code which is to ensure revival
and continuation of business of the corporate debtor as a going concern. In a
country where we still find the existence of pre-colonial laws, the new code
even in its nascent stage has been a subject of various judicial pronouncements.
The Indian insolvency laws have seen a drastic change post-enactment of the new
Code. At the present time there have been disciplined borrowings amongst
corporates and there are more potential investor pitching in because of the
assurance of repayment against the debts. Moreover, the promotors are taking
extra precautions while doing business due to the fear of losing control of
their enterprise to the creditors in the event of default.
There has been an increase in the number of insolvency resolutions that have
taken place within the time limit of 330 days due to the effective adjudication
of the matter. The key issues that the Code has faced during the last five years
are pertaining to low recovery rates, huge haircuts, prolonged delays,
digitalisation of insolvency ecosystem and shortage of resources.
Intended Vision (2025)
The laws relating to insolvency and bankruptcy have come a long way since the
inception of the Code. However, it is pertinent to note that there are certain
benchmarks that still need to be addressed and probably be covered by the year
Some of them are as follows:
- Decrease in liquidation:
The object of the legislation was to ensure the effective resolution of the
corporate debtor, however, it is seen that more than half of the companies
go into liquidation after the initiation of the CIRP. The main reason behind
the rising number of liquidation cases may be that the corporate debtors
under CIRP neither have any assets nor any lucrative business out of which
debts can be recovered by the resolution applicant. It is pertinent to note
that the resolution applicant only submits its resolution plan when there is
unsold inventory, land bank or receivables from clients.
Another reason may be that the resolution plan presented by Committee of
Creditor is not found to be commercially feasible and the haircut or mode of
commissioning is unacceptable by the resolution applicant. Thus, it is
expected that in the next three years the number of liquidation cases for
corporates undergoing CIRP will be reduced.
- Addressing delays:
The essence of the Code is the time-bound mechanism of insolvency
resolution, however, there have been prolonged delays seen in numerous cases
thereby breaching the statutory deadline of 330 days. It is noted that the
value of the assets of the debtors diminishes over time due to long delays
in insolvency process.
The government is expected to improve facilities to upskill the insolvency
resolution professionals, infrastructure, and digitalisation of insolvency
eco-system. Further it is expected that the prolonged delay at the stage of
admission by the Adjudicating authorities are addressed in a proper manner.
- Value difference between resolution and liquidation:
It is eminent to note that the value of company vide resolution should
always be higher than the value vide liquidation, however, it has been seen
that over the period this gap between the value of resolution and
liquidation has been narrowing. The goal is to make genuine efforts to save
the lucrative businesses by way of resolution and restructuring and only
when no option is left, liquidation should be resorted to.
The nature of the Code is to augment the chances of preserving the business
of the corporate debtor because liquidation would mean the death of the
business. Generally, liquidation is resorted in cases where resolution plan
is not workable, or the Committee of Creditors determines liquidation or
adjudicating authority rejects the resolution plan. A robust mechanism is
expected in the following years to increase the gap between resolution and
- Justified haircuts:
A haircut is when a creditor gives up a part of his share of the debt.
Apparently, in the last five years, the haircuts have gone up to 95% in
certain cases thereby affecting the business and profitability of the
creditors. Large haircuts affect the potential investor from lending money
because the value of money lend becomes very less against the money
recovered at a later stage.
A benchmark for the quantum of haircut is expected in the upcoming years and
large and unjustified haircuts should be addressed in a structured manner.
It should emphasize on securing the rights of the creditor which would lower
the borrowing costs as the risk will be minimized. The vision should be to
recover the maximum value from the corporate debtor and impose justified
- Pre-pack insolvency resolution:
A quick resolution process where the resolution takes place not by way of
public bidding but through an agreement between secured creditors and
investors. The key feature of pre-pack insolvency is the quick and timely
resolution process of maximum of 120 days for distressed companies. The
corporates prefer pre-pack insolvency over CIRP as the managerial control
stays with the corporate debtor and approval of the court is not compulsory.
However, outcome is binding on all stakeholders. It is eminent to note that
the pre-pack insolvency is currently only limited to Micro, Small and Medium
Enterprises. Therefore, it is expected that in the forthcoming years
pre-pack insolvency resolution will also be applicable to other corporate
- Cross-border insolvency:
In the past few years there has been a tremendous shift in the insolvency
regime yet the provisions relating to Cross border insolvency have been
stagnant. Currently, there are no standards to restructure the firms
participating in cross border jurisdictions. It is noteworthy that foreign
creditors are eligible to make claims against an Indian company, however,
the Code does not have standard tools for automatic recognition of
insolvency proceedings in foreign jurisdiction.
It is expected in the coming years, relevant amendments will be made in the
code pertaining to the Cross-border insolvency to enhance the effectiveness
of the insolvency resolution process and cater to cross border insolvency
The Code has affected companies and assets in multiple industries and has
presented a safer playing ground for potential investors. It is important that
the legal framework is clear and practically enforceable to facilitate
investment and ensure effective recovery of distressed assets.
Although it has been widely seen as effective since last five years, ambiguity
exists regarding specific issues that may have practical implications for
prospective investors and resolution applicants. Therefore, the vision in the
next three years should be to come up with full proof mechanism which caters to
the present challenges being faced by insolvency laws in India.
The Code still being in its nascent stage has done wonders in the insolvency
regime. It has substantially reduced the number of Non-Performing Assets over
the period of five years. It has not only helped in the survival of the
businesses but also secured the creditors from risk. Undoubtedly, there is still
a lot to be achieved to stand up to the benchmark set by the developed
jurisdictions, however, the Code is yet to see some remarkable improvement in
the forthcoming years.
The article is authored by Ketan Mukhija, Partner and Shorya Singhal, Associate
at Link Legal. The views expressed in this piece are those of the authors and is
not intended for any solicitation of work. Readers are always advisable to take
prior legal consultation before proceeding formally.